MADRID—A merger of two Greek banks sent stocks in Athens soaring, while investors elsewhere in Europe were inspired by remarks from the head of the U.S. Federal Reserve on Friday.

The Stoxx Europe 600 index rose 1.2% to close Monday at 228.28, after closing up 1% last week, snapping a string of four weekly losses.

Markets in London were closed for a holiday.

The Athens General Index jumped 14% to 1006.59 after EFG Eurobank Ergasias and Alpha Bank, two of the country’s largest banks, announced a friendly merger deal. Eurobank shares climbed 29% and Alpha Bank soared 30%.

“In our view, this merger will herald a new era for the domestic market as it will constitute a key catalyst for a radical transformation of the Greek banking system, with a positive repercussion across the other Greek banks,” Maria Kanellopoulou, banking analyst at Euroxx Securities, said in a note to investors.

Among other Greek stocks, both Piraeus Bank and National Bank of Greece climbed 29%.

Enthusiasm for stocks was driven by Ben Bernanke’s comments in Wyoming that the Federal Open Market Committee would weigh options on monetary policy at the panel’s next meeting in September. Relief that damage from Hurricane Irene wasn’t as bad as feared also helped boost equities.

Also helping underpin the positive tone, U.S. data showed consumers spent more and saved less in July, while an industry trade group said the number of Americans signing contracts to purchase new homes declined last month. U.S. stocks were sharply higher as European markets closed.

“What we saw on Friday was a rather less negative view by Fed Chairman Bernanke on the U.S. economy, and that obviously fueled expectations that the fear of the possible recession has been appeased somewhat,” said Predrag Dukic, senior equity salesman at CM Capital Markets in Madrid.

He said last week’s announcement of the continuation of the short-selling ban in some European markets also helped the market move higher.

“A technical rebound was in the cards because we’ve dropped a lot in the last few months. August has been a terrible month,” he said. The Stoxx Europe 600 is down nearly 15% for the month.

In France, the CAC 40 index rallied 2.2% to 3154.20. Société Générale added 3.6%. Veolia Environnement climbed 5.5% and Suez Environnement gained 3.2%.

The German DAX 30 index surged 2.4% to 5670.07. Gains were supported by a 5.2% rise in potash producer K+S, while utility RWE added 5.2% and E.On rose 4.6%. Shares of Commerzbank soared 4.2%.

Shares of adidas gained 3.7% as several retailers across Europe gained on the view that a recession in the U.S. was less likely.

The rally in Greek banks spilled over to Spain, where Banco Santander added 2.4%. The IBEX 35 index gained 2.5%. to 8395.00.

In the currency market, the euro traded recently at $ 1.4507, from $ 1.4499 late Friday in New York. The dollar was at ¥76.97, from ¥76.64.

Among commodities, crude-oil futures for September delivery was up $ 1.94, or 2.3%, at $ 87.31 on the New York Mercantile Exchange. Gold for August delivery was down $ 7.70, or 0.4%, at $ 1,786.40 on Nymex’s Comex division.

Write to Barbara Kollmeyer at barbara.kollmeyer@dowjones.com

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